The topic of ground leases has actually turned up numerous times in the past couple of weeks. Numerous A.CRE readers have actually emailed to request for a purpose-built Ground Lease Valuation Model. And I'm in the procedure of developing an Advanced Concepts Module for our property monetary modeling Accelerator program covering the mechanics of modeling ground leases. So I thought now would be an excellent time to share my Ground Lease Valuation Model in Excel.
This model can be used standalone, or added to your model. Either method, it is valuable for both landowners aiming to size a ground lease payment or leasehold owners looking to understand the worth of the leasehold (i.e. enhancements) relative to the cost basic interest (i.e. land).
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Excel model for evaluating a ground lease
What is a Ground Lease and Leasehold Interest?
If you unfamiliar with the principles of Ground Lease and Leasehold Interest, I'll refer you to the meanings in our Glossary of CRE Terms:
Ground lease - "A lease structure where an investor leases the land (i.e. ground) only. In the case of a ground lease, typically one celebration owns the land (i.e. charge easy interest) while a different party owns the enhancements (i.e. leasehold interest). In most cases, the owner of the land rents the land to the owner of the enhancements for an extended time period (20 - 100 years)."
Leasehold Interest - "In realty, a leasehold interest refers to a structure where a specific or entity (lessee) leases the land (i.e. ground lease) from the fee basic owner (lessor) of the land for an extended time period. The lessee of a leasehold estate will normally own the improvements on the land and use the land and enhancements as if the lessee were the owner of the land. During the term of the ground lease, the lessee will pay lease to the lessor for use of the land. At the end of the ground lease term, the lessee must return use of the land, and any enhancements thereon, to the land owner.
Ground leases prevail to prime areas, where landowners do not necessarily wish to offer however where they may not have the knowledge (or desire) to operate. Thus, they lease the land to someone who owns and runs the enhancements on the land, and receive a ground lease payment in return. You see this on a regular basis with office structures in the downtown core of major cities.
Another case where you'll encounter ground leases remain in retail shopping centers. Oftentimes, prominent retail renters prefer to develop and own their space however the developer does not always desire to sell the land. So, the retail renter will agree to lease the ground for 40+ years and develop their own building on the leased land. Banks, national dining establishments in outparcels, and large department stores are examples of occupants that frequently consent to this structure.
Quick Note: Not interested in DIY analysis? Consider working with A.CRE Consulting to manage your bespoke modeling project.
How to Use the Ground Lease Valuation Model
All areas of the Ground Lease Valuation Model are contained on one worksheet. This is deliberate to permit you to place this design into your own property-level model to make it easier to include a ground lease part to your analysis.
All analysis is carried out on the tab entitled 'Ground Lease'. A 'Version' tab is likewise consisted of where you can view a change log for the model, in addition to discover crucial links connected to the design.
The Ground Lease worksheet is broken up into 7 sections as described and described below:
The Residential or commercial property Description area consists of five inputs related to the financial investment. These inputs are:
SF/M2 - In cell I3 go into whether the measure of size is in square feet (SF) or square meters (M2).
Residential or commercial property Name - Name of the investment. It is common in genuine estate to append the name of the investment with (Ground Lease) to denote that the financial investment is for the charge basic interest in land with a ground lease.
Address - Address, city, state/province, zip/postal code, and nation.
Land Size - Total SF or M2 of land. The variety of acres or hectares will than instantly be computed in cell E6.
Leasehold Net Rentable Area - Total net rentable area in SF or M2 of the physical improvements (i.e. the leasehold). The land is presumed to be owned by one person or entity, and the leasehold interest (i.e. enhancements) to be owned by a separate person or entity. So for example, you might be thinking about getting the arrive at which a Target Superstore is built. Target owns the structure and is renting the land for some prolonged amount of time. The overall rentable location of the building is the 'Leasehold Net Rentable Area'.
Section 1 - Residential Or Commercial Property Description
The Investment Timing area consists of 4 required inputs and one optional inputs. These inputs are associated to the chronology of the ground lease and financial investment.
Ground Lease Start Date - The month and year when the ground lease started. This must likewise be the month and year of the first payment.
Next Ground Lease Payment - The month and year when the next ground lease payment is due.
Ground Lease Length (Years) - The length of the ground lease in years from ground lease start through ground lease maturity. This is the total length of the ground lease, not the number of years staying. The optimum length is 100 years. Based on the ground lease length, the design then calculates the Ground Lease End Date (i.e. maturity date).
Analysis Start Date - The month and year that the analysis is to start. This normally is equal to the Next Ground Lease Payment date, although the model was developed to enable analysis to start prior to the Next Ground Lease Payment date.
Analysis End Date - An optional input, this is by default the Ground Lease End Date. In case you're examining a shorter hold period, just alter the orange font cell I17 to the favored analysis end date.
Section 2 - Investment Timing
The Ground Lease Terms area contains the company terms of the ground lease, including payment quantity, frequency, and rent boosts. This section includes five inputs plus the option to by hand design the lease payment quantities.
Initial Payment Amount - The quantity of the first lease payment. Depending upon the payment frequency input (see below), this amount may be for a yearly or month-to-month payment.
Lease Increase Method - The technique utilized to model lease increases. This can either be: None - No lease boosts.
% Inc. - A portion boost over the previous rent quantity.
$ Inc. - A quantity boost over the previous rent quantity.
Custom - Manually model the rent payment amounts by year. If Custom is selected, the yearly rent payment quantities in row 26 end up being inputs for you to by hand change (i.e. font turns blue). Important Note: If you pick Custom and begin to change the annual rent payment amounts in row 26, there is no way to revert back to another Lease Increase Method.
Section 3 - Ground Lease Terms
It is within the Valuation (Fee and Leasehold) section where you determine the reversion worth of the land (i.e. ground lease), today worth of the land (i.e. ground lease), and the imputed value of the leasehold interest. This section is broken up into 3 subsections, with five inputs and one optional input across the three subsections.
Ground Lease Reversion Value - Within this subsection you design the value of the residential or commercial property as if there was no ground lease. Or in other words, a typical direct cap valuation of a genuine estate financial investment. Inputs include: Current Net Operating Income (Annual Before Ground Lease Payment) - Enter the yearly net operating income stemmed from renting the enhancements, exclusive of any ground lease payment.
Market Cap Rate - The cap rate for the residential or commercial property, as if no ground lease was included. The idea being to get here at a value of the residential or commercial property before representing the ground lease.
Retenanting Costs (Nominal) - At the end of the ground lease term, the ground lessor will get back the land plus any enhancements on the land. What will it cost (i.e. Retenanting) to retenant the residential or commercial property in today's expense (i.e. before inflation). Retenanting may include basic leasing expenses, it may consist of renovation and leasing, or it may consist of taking down the structure and reconstructing something brand-new. The concept is to get to a 'Net Reversion Value (Nominal)' after accounting for the cost to retenant.
Reversion Growth Rate (Each Year) - All of the above computations are done before representing inflation (i.e. development). Enter a growth rate here, and the 'Net Reversion Value (Nominal)' will be grown to get to a 'Reversion Value (Adjusted for Growth)' utilized as the reversion value in the ground lease present worth estimation.
Reversion Value (Adjusted for Growth) - Optional Input. The reversion worth used in the ground lease present worth estimation. It is computed by taking the residential or commercial property value internet of any retenanting costs, and after that growing it by a development rate. The value is an optional input in the occasion you want to personalize the reversion value.
Discount Rate - The discount rate at which to calculate today value of the ground lease capital. Think about this discount rate as an obstacle rate (i.e. required rate of return) for a ground lease financial investment.
Section 4 - Valuation (Fee and Leasehold)
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The Ground Lease Returns (Unlevered) area enables you to compute the unlevered (i.e. before debt) returns of a ground lease investment. If you are thinking about buying a ground lease, it is within this area where you can enter your acquisition/investment cost, and see the matching returns from that financial investment. The area consists of simply one input.
Ground Lease Investment Cost - This is the expense to get land with a ground lease. It must include the acquisition expense, together with any other due diligence, closing, and pursuit costs connected to the financial investment.
After getting in the Ground Lease Investment Cost, the section computes five return metrics:
- Unlevered Internal Rate of Return
- Unlevered Equity Multiple
- Net Profit Average Rate of Return
- Average Free-and-Clear Return
Note that the resulting returns are highly depending on the analysis duration, payment schedule, and reversion value.
Section 5 - Ground Lease Returns (Unlevered)
The Ground Lease Returns (Levered) section enables you to determine the levered (i.e. with debt) returns of a ground lease investment. If you are considering acquiring a ground lease and intend to finance the purchase, it is within this section where you can enter the financial obligation presumptions, and see the matching return from that levered financial investment. The area consists of 3 inputs.
Ground Lease Permanent Loan Amount LTV- Enter the loan-to-value of the ground lease mortgage, and the design will determine the loan quantity. - Annual Interest Rate - The yearly rate to be paid on the mortgage. Note that the model presently just enables an interest-only loan.
- Interest-Only Payment (Annual vs. Monthly) - Enter whether the mortgage payment will be due monthly or each year.
After entering the debt presumptions for the ground lease financial investment, the section determines 5 return metrics:
- - Levered Internal Rate of Return - Levered Equity Multiple
- Net Profit
- Average Rate of Return
- Average Cash-on-Cash Return
Similar to the unlevered analysis, the resulting returns are extremely depending on the analysis period, payment schedule, and reversion worth. The amount and rate of the financial obligation will also heavily drive the levered return. And as a tip, in the meantime the design just enables financial obligation with interest-only payments and a balloon at the end of the analysis period.
Section 6 - Ground Lease Returns (Levered)
The final area is where backend inputs utilized in the various data recognition lists are found. Unless you plan to modify the design, there is no factor to change the worths in this section.
Section 7 - Data Validation
Video Walkthrough - Using the Ground Lease Valuation Model
In addition to the written assistance above, I have actually assembled a brief video that walks you through the numerous areas of the design. Note that this video is based on v1.0 of the design.
Download the Ground Lease Valuation Model
To make this design available to everyone, it is provided on a "Pay What You're Able" basis with no minimum (get in $0 if you 'd like) or optimum (your support assists keep the content coming - typical real estate appraisal models cost $100 - $300+ per license). Just go into a price together with an email address to send the download link to, and after that click 'Continue'. If you have any concerns about our "Pay What You're Able" program or why we provide our designs on this basis, please connect to either Mike or Spencer.
We frequently upgrade the design (see version notes). Paid factors to the model get a brand-new download link through email each time the model is updated.
Version Notes
Version 2.33
- Rewrote 'Flying Start Guide' with updates and for improved readability - Updates to placeholder worths
- Fix to misspelled word on Version tab
Version 2.32
- Removed redundant information in E17: G17. - Updated I22 to show more accurate years of term staying.
- Updates to placeholder worths
Version 2.31
- Further modifications to logic in I59
Version 2.3
- Fixed concern where the OFFSET() variety in the optional formula for 'Reversion Value' (I59) was missing out on the last cell
Version 2.2
- Revised formula in M26: DG26 to solve for concern when payment is Monthly and not % Inc (thanks to Accelerator member JS for the repair!). - Updates to placeholder values
Version 2.1
- Updates to placeholder values. - Added additional notes under 'Quick Start Guide' to clarify typical confusion around start dates for different areas.
- Misc. formatting updates
Version 2.0
- Moved 'Analysis Start', 'Analysis Period', and 'Analysis End' inputs above Ground Lease dates for enhanced user experience. - Added a 'Flying Start Guide' to supply a tutorial for utilizing the model.
- Renamed 'Lease Increase Method' to 'Lease Payment Increase Method' for explanation purposes.
- Renamed 'Ground Lease Reversion Value' to 'Current Fee Simple Value and Ground Lease Reversion Value'.
- Added 'Investment Term' assumption to enable investor to analyze returns on an Analysis Period shorter than the Ground Lease term - Renamed 'Investment Timing' to 'Valuation Timing' to differentiate between evaluation and financial investment returns.
- Renamed 'Analysis Start Date' to 'Valuation Start Date', 'Analysis Period' to 'Valuation Period', and 'Analysis End' to 'Valuation End'.
- Updated heading formatting to much better separate between Valuations sections and Investment Returns areas.
- Adjusted return solutions to make vibrant to Investment Hold Period
Version 1.0
- Initial release
About the Author: Spencer Burton is Co-Founder and CEO of CRE Agents, an AI-powered platform training digital colleagues for industrial realty. He has 20+ years of CRE experience and has underwritten over $30 billion in real estate throughout top institutional firms.